Japan Equity: Outlook 2026
December 2025 | Ernst Glanzmann
Economic policy changes
The new administration is pursuing a mix of fiscal easing and deeper government intervention in the Bank of Japan (BoJ) policy. This is expected to result in “higher for longer” inflation, weakening domestic growth potential and rising dependence on external demand – all while supporting asset price appreciation.
Fiscal Easing
- During Abenomics1, corporate profits were largely retained internally. Now, with strengthened corporate governance and labour shortages, more companies are shifting toward growth-oriented strategies. As a result, the upcoming fiscal stimulus is more likely to be channelled into growth investments. Corporate behaviour has evolved from risk avoidance & survival to risk control & growth.
- A key difference from Abenomics is the current inflationary backdrop. Although largely cost-push in nature, firms are increasingly compelled to pursue sustainable wage growth to secure talent.
Risk:
Japan’s government debt-to-GDP ratio was risen from around 230% during Abenomics to around 260% in 20202, leaving far less fiscal room.
Can similar outcomes be expected?
Abenomics’ major shortcoming was limited regulatory reform, constrained by vested interests. With Aso holding the real power centre and Takaichi unlikely to push through fundamental deregulation, meaningful reform seems improbable. Overreach could also deepen internal Liberal Democratic Party (LDP) divisions.
Government Intervention in the BoJ
Government influence over the BoJ is expected to increase, echoing the Abenomics era. During Abenomics, the government and the BoJ jointly set a 2% inflation target, and the BoJ conducted massive Japanese Government Bonds (JGB) purchases—effectively reducing its independence. Under “Sanaenomics,” government influence is again likely to rise. However, the scope for additional JGB issuance is narrower than before.
Yen outlook
The structural depreciation of the yen cannot be fully explained by interest rate differentials alone, the underlying trend in real currency demand is more important. Increased government involvement in BoJ policy makes rate hikes less likely, putting short-term downward pressure on the yen. However, if the yen weakens beyond JPY 160/USD, the inflationary impact on import prices could prompt intervention. On the policy front, Takaichi’s support for nuclear restarts may help improve Japan’s trade balance by reducing fossil fuel imports. At the same time, the expansion of digital consumption – dominated by foreign firms – will likely increase real dollar demand, keeping the yen weak.
Fiscal easing will also boost liquidity for overseas investment, adding to dollar demand. Only if significant domestic deregulation occurs might Japanese capital be repatriated, increasing yen demand.
Growth stocks
In an inflationary environment, the ability to sustain strong top-line growth is critical – favouring growth stocks fundamentally, though valuations may remain capped. If the US economy enters a downturn, Japan’s rate-hike cycle could end early, raising the risk of stagflation. In the short term, value stocks may outperform, but over time, quality growth with high profitability should lead performance.
Domestic demand
Food inflation remains sticky due to yen weakness. While wage gains ae improving disposable income in real terms, pace of nominal wage gains is slowing, and it remains uncertain whether real wages will turn positive in 2026. Upside from inbound tourism is limited by persistent labour shortages in Japan’s service industries.
Lessons from 2025 and opportunities in 2026
2025 reminded investors that even high-quality growth companies can face short-term setbacks. In Japan, rising risk premiums disproportionately weighed on companies with weak earnings and limited commitment to improving return on equity (ROE), leading to stock outsized underperformance beyond the scale of their profit decline. Our strategy was affected by this dynamic.
Going forward, we see ROE improvement as critical catalyst for share price performance. For new investments, a genuine commitment to enhance ROE remains a key selection criterion.
Global risks and opportunities: US political and economic uncertainty
With Trump in power and expected to remain in office next year, policy volatility across trade, fiscal, and institutional dimensions is likely to increase. “Protective” tariffs, strict deportation policy and expansionary fiscal policy could reshape global trade and accelerate the fragmentation of global supply chains.
While this poses risks for Japan’s export-dependent sectors due to trade realignment and potential tariff spillovers, globally active Japanese firms with technological strength, adaptive management, and innovation capacity stand to benefit from integration into new US-centred industrial ecosystems.
Ernst Glanzmann is an Investment Director investing in Japan Equity strategies at GAM Investments.
1Source: Abenomics was the economic policy package of former Japanese Prime Minister Shinzo Abe, launched in 2012 to revive Japan's economy after decades of stagnation.
2Source: International Monetary Fund (IMF), Gross public debt, percent of GDP, as at October 2025.
2Source: International Monetary Fund (IMF), Gross public debt, percent of GDP, as at October 2025.